Lebanon’s Perfect Financial Storm

At Hope or Gloom, an economic conference held by Lebanese International Finance Executives (LIFE) on August 7 that brought together economic experts and Lebanese government officials, the state’s narrative bordered on the absurd. Government advisors and parliamentarians issued unconvincing economic predictions and reassurances, all of which showed a disconnect from the clear signs of impending economic disaster. Notably, in addition to longer-term financial problems, a possible drop in remittances—especially due to worsening financial prospects in the Gulf—could worsen banks’ ability to continue financing the public debt.

Lebanon’s economy is struggling. Recent annual growth continued to hover between 1 and 1.5 percent throughout 2017 and 2018, a long-term issue tied to the Syrian war, which caused a drop in exports and worsened investors’ fear of instability. This is a significant drop from the 8 to 10 percent growth witnessed prior to 2011. This meager growth pales in comparison to rate at which the debt is growing, estimated at 7.5 percent as of May 2018. This means Lebanon will not be able to pay off this debt through economic growth alone. This has left Lebanon’s debt-to-GDP ratio at 157 percent as of April 2018, the fifth-highest in the world. Moreover, as Lebanon fails to pay down its public debt—which amounted to $81.5 billion as of February 2018—interest payments on the debt are rising and further widening the fiscal deficit, currently estimated to be over 8.5 percent of GDP.1

Even the usually unflappable Finance Minister Ali Hasan Khalil warned in April that Lebanon’s public debt was more of a threat than the country’s security situation. Banks have been taking their own steps to mitigate it, in particular seeking to prevent capital flight and maintain the current level of currency deposits by printing more money to finance the debt—which alleviates the debt but worsens inflation.2 To encourage people to save, average interest rates on deposits of Lebanese pounds increased by 95 basis points between February 2017 and February 2018 to reach nearly 7 percent. This not only puts more money in the central bank but also discourages the high spending that can increase imports and therefore deplete foreign reserve levels. But if the deposit rates climb too high, it will also increase inflation and discourage taking out loans for new enterprises that could spur much-needed economic growth. The Central Bank has already tightened lending provisions, in response to rising non-performing loan ratios that reflect nonpayment of debts.

This lack of access to loans, as well as foreign investors’ decreasing trust in Lebanon’s economy, has notably affected the real estate sector, one of Lebanon’s economic pillars. Without easy access to loans, together with the prevailing political and economic crises that are discouraging investment in Lebanon, the sector has been on a steady decline. Construction of new buildings has slowed dramatically: the total area of land to be developed under new registered building permits fell by 23.9 percent in the second quarter of 2018 compared to the same period in 2016. Facing such pressures, Sayfco—one of the largest Lebanese real estate companies, with projects worth an estimated $2 billion—went bankrupt in May 2018.

According to a World Bank report issued in April 2018, these problems trace back in part to long-term financing challenges, but also to the November crisis between Saudi Arabia and Lebanon. On November 4, Prime Minister Saad Hariri issued a televised statement from Riyadh resigning his position, citing Iranian influence via Hezbollah rendering it difficult for him to do his job without fear of assassination. The situation quickly escalated with claims that Saudi Arabia was holding Hariri hostage. In response, Riyadh threatened to expel Lebanese nationals working in Saudi Arabia and other Gulf states and withdraw investments from Lebanon. Through French intervention, Hariri and his family were able to leave Saudi Arabia, and he withdrew his resignation on December 5, calming the situation down, but tensions have remained high.

The tensions between Saudi and Lebanon are affecting remittances. Lebanese workers in the Gulf contribute nearly one-fifth of Lebanon’s GDP, making them a vital source of the deposits banks are using to buy more debt. The approximately 400,000 Lebanese expats in the Gulf—half of them in Saudi Arabia—contributed to between 43 percent3 and 60 percent of total remittances in 2015, but total remittances dropped by 7 percent in 2017. Another decline is expected this year, as Saudi Arabia’s Vision 2030 undertakes unprecedented economic restructuring to provide more jobs for Saudi nationals. Already, increased taxes on foreign residency permits in Saudi Arabia are making jobs for Lebanese nationals scarcer. Dubai, another hub for Lebanese workers, is also facing an economic downturn and higher overall unemployment that will reduce opportunities for foreign nationals in general. Although remittances are still coming in steadily from other regions, money earned by Lebanese workers in the Gulf will continue to decline in the face of these trends.4

The tensions are also affecting Lebanon’s other main revenue-generating sector, tourism. It was already in decline due to security concerns and high airline and hotel prices, falling from its peak of 2.2 million visitors in 2010. Since tensions with Saudi Arabia erupted, there has also been a sharp decline in tourism from Gulf visitors, who spend the most money while in Lebanon. Spending by Saudi tourists decreased by 21.4 percent in the first half of 2018 compared to the same period in 2017. Likewise, total visitors from Saudi Arabia dropped by 21.1 percent compared to the same period of last year, and visitors from the UAE dropped by 32.2 percent.

Given that Lebanon’s three main revenue-generating sectors—real estate, tourism, and remittances—are dangerously in the red, combined with soaring debt and eroding trust in its banking sector, bankruptcy could be imminent. International aid is unlikely to help avert bankruptcy, even in the short term. In April 2018, an international donors meeting in Paris pledged more than $11 billion of investment for Lebanon, but conditioned the aid on strict economic reforms that cannot be enacted without a functioning government—the formation of which remains stalled five months after parliamentary elections due to political bickering. The World Bank has likewise earmarked $2.2 billion for investments in Lebanon to be spent on job creation, health services, and transportation projects all of which require government’s approval before it can be disbursed.

Speaker of the Lebanese parliament Nabih Berri attempted to circumvent government approval by proposing on September 24 that parliament be authorized to approve urgent legislation but was unable to get parliamentarians to stop bickering long enough to debate the proposal, let alone vote on it. For now, the political elite appears to be more concerned with securing prominent appointments on the next cabinet, however long it takes, rather than speeding up the process so they can get to work fixing the economy.

Looking at the lack of progress on economic reform, World Bank Group Vice President for the Middle East and North Africa Ferid Belhaj stated in July that “Lebanon has been defying gravity for quite some time.” It appears than in the near future Lebanon will realize it cannot beat gravity. Its only saving grace remains in finalizing political institutions, namely the cabinet, which can then prioritize reforms.

Mona Alami is a nonresident fellow at the Atlantic Council and at Trends Research and Advisory. Follow her on Twitter @monaalami.

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